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Sunday, 19 February 2012

Over the last year I've become somewhat intrigued by Glencore and other physical commodity traders. Part of that interest comes from my work on commodity speculation, and the fact that much of the analysis around that issue has focused on investment banks and hedge funds rather than the companies that actually deal in physical commodities. Part comes from my fascination with figuring out how the global trade system works. Glencore has the added draw of being a notoriously opaque and secretive company, with a controversial and swashbuckling ex-captain who made a name for himself by doing deals that no-one else would do. Trying to figure out how their vast commodity operations work is a detective mystery if ever there was one.

In May 2011 they went public and listed on the London Stock Exchange. That means they sold ownership stakes to investors via the UK market. Technically speaking though, they only sold about 12% of the company, and technically speaking, they're not based in the UK. Rather, Glencore is based in the Canton of Zug in Switzerland, which is, to use the words of the Canton's publicity team, renowned for 'its business-friendly mentality'... which is to say... um... low taxes. For tasks other than tax accounting, Glencore has other cosy offices, like the one in London, on Berkeley Street, next door to the Sainsbury’s that I used to buy salads at back in 2010.

Stirring the copper kettle

Anyway, last week I published an article about Glencore in The Ecologist, after spending some time digging into some of their operations in the Democratic Republic of Congo. The editor put in a byline which kind of sums it up: "Moves by unknown shell companies to control lucrative natural resources may have cost Democratic Republic of Congo $1 billion in lost revenue, as UK-listed mining company Glencore under pressure to explain deals"

Sounds pretty interesting right? If you want more detail, take a look at the article, but basically it concerns two mines in Katanga Province - Mutanda and Kansuki - that Glencore co-owns and operates. Back in early 2011, their business partner in the deals - the Congolese state-owned mining company Gecamines - sold off its stakes to two shell companies listed in the British Virgin Islands, associated with a controversial diamond dealer called Dan Gertler, allegedly at a big discount. This is by no means a new story - it first emerged back in July 2011 - but it’s a story that’s been seriously underreported and one that remains unresolved. In September IMF expressed concern, and a UK MP called Eric Joyce continues to try raise awareness about these, and other deals in the DRC copper-belt (see map below).

I wanted to write about the Mutanda / Kansuki issue to
help keep it in the public eye. I also noticed that most
reports to date have focused on the DRC companies involved. I
wanted to ask another question: How much does Glencore know about what went on?

So I did ask that, but when I phoned Glencore, it appeared they didn't think much of my query. I got to chat to Glencore's main media spokesman, a pleasant guy called Simon
Buerk (who incidentally used to work as the spokesman for Shell, so I guess he’s pretty well practised with inquisitive journalists asking probing questions). Simon was actually very open and took
substantial time to chat to me whilst driving on a Swiss highway. His message, as quoted in the Ecologist article, was
simple: Glencore is aware of the accusations against Gecamines, but these deals involve parties external to Glencore and therefore it is irrellevant to ask their opinion on it.

It’s a
line which I find difficult to accept fully. It’s true that Glencore
is not legally responsible for the actions of its business associates, but can we not argue that they
have a moral duty of care to their shareholders to make sure
every deal they’re involved in has very robust overall governance? If nothing else, the highly non-transparent manner in which the deals took place should immediately raise concerns among the public, and shareholders, especially when it concerns the DRC, a country notorious for poor institutions. Can Glencore assure it's shareholders that they're associated with business partners that uphold robust governance standards?

Taking ownership

Then again, most of Glencore's shares are held by the company management, and a handful of institutional investors (which include Abu Dhabi based Aabar Investments, the sovereign wealth fund of Singapore, and BlackRock). Whilst the institutional investors could be encouraged to ask questions, it's difficult to get such organisations to do so. On the other hand, if I buy some Glencore shares, I become a part-owner of the company, with a theoretical right to raise my concerns with the management, who I would technically-speaking employ (see my earlier post about my experiences doing this with Centrica).

So, last Saturday I attended the FairPensions Shareholder Activism training day held at Amnesty UK's Shoreditch offices. It was attended by a whole range of people from civil society organisations, looking to use the power of owning shares to push forward progressive causes, whether it be countering tar sands in Canada, questioning arctic oil drilling, or combating tax avoidance. For my part, I took the opportunity to workshop some potential questions to ask Glencore management at their annual general meeting.

An interesting question
to ask the executives would be something like this: "Recently UK MP Eric Joyce and the IMF raised serious concerns about the sale of stakes in mines you co-own in the DRC. Joyce, and others, claim that your initial partner in the mines secretly sold their stakes to shell companies associated with a person closely connected to the DRC president Joseph Kabila, and did so at hugely discounted prices. This raises the issue of what due dilligence processes you have in place when entering into joint ventures with partners in countries known for high levels of political risk. My questions to you are 1) Are you aware of these allegations related to your business associates, and 2) What procedures do you have in place to assure shareholders that the company will not be exposed to potential future damages arising from reputational risk and politically-imposed penalties and fines?"

I'd probably need to get the question more precise and I suspect the answer would be pretty generic, but that’s not
the point. Glencore undoubtedly has a strong response, but
the fact of the matter is that nobody has yet challenged them, and if there is
one thing that I believe as a general principle, it’s that it’s always
preferable to challenge power than to not challenge it.

Hey guys, can I call you StrataCore?

That's going to be all the more important now that Glencore has announced a probable merger with XStrata, which would create a commodity behemoth unlike any we've seen before (The press are calling them Glencore
Xstrata, but I bet they'll call themselves StrataCore). Glencore specialises in commodity trading, and XStrata specialises in physical mining, and whatever the combined entity gets called, both companies think that there
is great potential for 'synergies'. In particular, there will be increased potential for
‘geographical arbitrage’, which is a fancy way of saying the company will have superlative ability to source low price commodities whilst selling them in places where the prices are much higher. It plays into the hands of Glencore's core business model, which revolves around its ability to make
money
off global commodity market inefficiency (Indeed, the original way Glencore founder Marc Rich did this was by doing deals in places where commodity prices were depressed by political isolation or turmoil, a skill that requires aggression and significant exposure to gatekeepers who are politically exposed).

If nothing else, Glencore and XStrata will have synergies in the Canton of Zug, where both companies are 'based'. The combined entity will be able to share a
mailbox, and a tab at the local pub.